How to Choose a Debt Management Program
Choosing the best debt management program can free you from the nightmare of unpaid bills and help you return your finances to good health. The best debt management program offers a structured path out of debt, but a poorly designed one – especially one you can’t afford to finish – can make things worse.
Given the importance of the decision, it pays to understand what debt management programs can do for you and how they do it. You need to ask how a program will eliminate your debts; how successful it’s been with other clients; what sort of financial education you will receive while in the program; and what participating in it will cost.
Getting out of debt can solve a lot of life’s problems. The right program is your lifeline to get your financial house in order.
Before enrolling in a debt management program, understand the scope of your financial problems. To make that assessment, you need to speak with a credit counselor, a mandatory first step before you enter any sort of debt-relief program. The good news is that a first meeting is free. You can find a nonprofit credit counselor in various ways. Remember to ask lots of questions as you search:
- Search for a counselor through a professional organization. The National Foundation for Credit Counseling (NFCC) and the Association of Independent Consumer Credit Counselors have websites that will help you find a nonprofit credit counseling agency. Their members are required to adhere to best-practice standards.
- If you know a bankruptcy attorney, you can ask for a reference. Bankruptcy attorneys usually can tell you about the most reputable credit counselors in your area.
- Choose a counselor that offers services in a convenient way. Many credit counseling agencies do their meetings by phone or over the internet. Not every consumer can schedule an appointment during business hours. Ask if the counselor is available to speak by phone or meet after standard work hours.
- Do your own research. Creditors might be able to refer you to a counseling agency. You can also check online sources for news stories about credit counselors.
- Remember that this is serious stuff. If you enter a debt restructuring and repayment plan, you’re expected to stick with it and that usually means three-to-five years. Credit counseling agencies work with card companies to reduce the interest you pay on your debt. If you don’t follow through with the payments, those interest-rate concessions can be cancelled.
- Speaking with a credit counseling agency has no impact on your credit score.
Sometimes speaking with a credit counselor is all you need to develop a financial plan and you will be able to manage your own repayment plan. When you go to a counseling session, ask questions about building a workable household budget. Also ask about debt re-aging, a technique that reports past-due debts as current, avoiding credit problems that result from delinquencies. Creditors will sometimes work with you on this if it means they will be repaid. Creditors also might be willing to reduce interest rates and late fees and change your repayment schedule.
If your debt problems are more complicated, the counselor probably will recommend a debt management program which involves an agency contacting your creditors, consolidating and perhaps reducing your debts and creating a repayment plan that will eliminate your debts within three to five years. Keep in mind that most agencies ask you to stop using all but one credit card and that is for use only in emergencies.
Reputable nonprofit credit counselors and managers are trained and have experience. At the initial counseling session, ask about their credentials. You should also do your own research before you pick a counselor or debt manager. It’s an important choice that could have huge consequences for you financial well-being.
Ask About Fees
Though the initial consultation is free, there is a charge if you enroll in a debt management program. DMP fees vary from one agency to another and so do billing arrangements. You should know what you would be charged before you enter in an agreement. Some agencies charge big enrollment fees, set up fees and monthly fees. You should get a very specific rundown of how fees are assessed and how you will pay them should you use the agency.
Several things to remember:
- Most agencies are subject to state law and are limited in what they can charge. Ask the counselor about any state laws that pertain to the services it offers.
- Most states license debt management agencies. Ask if the agency you’re considering is licensed. If your state requires a license and the agency doesn’t have one, move on.
- If you can’t afford the fees, talk about that with the counselor. Agencies should waive fees if you show that can’t afford them.
- Make sure the fees are reasonable, not exceeding $50 monthly for a debt management plan. You will likely also pay an enrollment fee, which averages less than $50.
- If the agency asks for a voluntary contribution, find another agency. This should not be part of the package.
- Ask about financial education. The agency should be able to provide instructional material and ongoing counseling at no charge.
- Expect the agency to review all your financial statements, creditor names, account interest rates and account status information before giving you a quote on what it will charge you, if anything.
Doing a Background Check
Any company you are considering working with should have a strong Better Business Bureau profile. Search the company name on the BBB website and review the overall letter grade and the complaint history. You want to see that the company you’re working with has a low number of complaints and has worked to resolve them. You can review InCharge Debt Solution’s BBB profile here.
You also want to make sure that the debt management company you work with is accredited by the Council on Accreditation. CoA accredits organizations that adhere to the highest standards in counseling for the benefit of individuals, families and communities. The CoA mark represents a high level of accountability, efficiency, data protection and employee qualifications. When you work with a credit counselor from a CoA-accredited organization, you can be assured that you are receiving the highest quality of service in the industry.
Debt management plans typically involve the consolidation of debts into a single monthly payment to the agency, which then repays your creditors based on an agreement it has reached. You should ask how your payments will be dispersed to your creditors and ask for documentation, either through an agency website or a monthly statement. Remember, these are your debts and you are responsible for their payment, even if the agency you retained is handling the transfers.
Review Your Action Plan & Agreement
Don’t sign a debt management program if you don’t understand the terms of your repayment plan or agreement. Call a counselor and ask questions. Make sure you thoroughly understand your monthly payment, fees charged by the agency, penalties for dropping out of the program and how many years until you will be debt free. Review interest savings estimates from different agencies.
A debt management program is a long-term relationship that should not be entered without thoroughly understanding what you will have to pay your creditors and the agency. Don’t enter a debt management agreement if you foresee problems that might result in default. Failing to adhere to the agreement could lead to bankruptcy.